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Taxes


Anyone who likes getting a look at their future tax expenses might be interested in seeing what next year’s tax brackets and tax rates will be. The IRS has now announced the official rates and brackets for 2014, although the numbers have been predicted for months because the IRS uses a simple process of inflation and somewhat round numbers to determine the brackets. Congress isn’t expected to make any changes to the tax laws this year, unlike the last several years when the question to continue Bush-era tax breaks needed to be addressed every year.

Keep in mind that the 2014 federal income tax brackets don’t matter to most people until they file their 2014 income tax returns in early 2015. That’s a long way off. But for those who pay estimated taxes for 2014 income throughout the year, the information doesn’t hurt. Chances are you’re getting ready to settle your 2013 income taxes, which will be due April 15, 2014. In that case, the rates and brackets you want to review are the 2013 rates and brackets.

Before getting to the numbers, keep in mind what marginal rates are. Your marginal rate is what you pay on your last dollar of income earned. If, for example, you will earn $50,000 in 2014, your marginal rate will be 25%. That does not mean you pay 25% on all of your income.

In fact, there is a strongly-held belief that the tax code penalizes people for earning more. I’ve heard people expressing disappointment with receiving a bonus because it might push them into the next tax bracket. Yes, as you earn more money, you’ll owe more income tax (in general), but when you’re in a higher tax bracket, it doesn’t affect the tax you owe on income below that new bracket’s threshold. There’s no big jump — the higher tax rate applies only to the income you earn above the top bracket’s baseline.

(Employers have a funny way of withholding taxes on your bonus payment, but to the IRS, and in the end when you finally settle your tax bill, a dollar is a dollar whether it was earned as salary or bonus.)

There’s one instance when it does make sense to be concerned about receiving more income — when that income comes in the form of an asset that’s not very liquid. Here’s an example: In the rare circumstance you win a new car in a contest or sweepstakes, the value of that car must be treated as income. If you win a $60,000 car, you’re going to have to come up with more cash to pay taxes on that $60,000. This is one of the reasons many who end up winning these kinds of contests end up selling the prize.

The 2014 federal income tax brackets and marginal rates.

The federal income tax brackets and marginal rates have now been officially announced by the IRS. These were the rates predicted by Wolters Kluwer, CCH several months ago, based on the rate of inflation the IRS announced it would use in September. The Tax Foundation, a non-partisan tax research group based in Washington, D.C., has also shared the official information.

Rate Single Filers Married Joint Filers Head of Household Filers
10% $0 to $9,075 $0 to $18,150 $0 to $12,950
15% $9,075 to $36,900 $18,150 to $73,800 $12,950 to $49,400
25% $36,900 to $89,350 $73,800 to $148,850 $49,400 to $127,550
28% $89,350 to $186,350 $148,850 to $226,850 $127,550 to $206,600
33% $186,350 to $405,100 $226,850 to $405,100 $206,600 to $405,100
35% $405,100 to $406,750 $405,100 to $457,600 $405,100 to $432,200
39.6% $406,750 and up $457,600 and up $432,200 and up

Determining your effective tax rate.

The table above lists marginal tax rates. What might be more interesting to calculate is your effective tax rate. For example, if you’re single, you earn $100,000 in taxable income in 2014, your effective tax rate — how much tax you end up paying as a percentage of your income — will likely be much lower than the marginal tax rate of 28%. It could be half of that. After taking out the standard deduction for your income, which in 2014 will be $6,200, leaves you with $93,800 in taxable income, although there might be other deductions that apply to you.

With $93,800 in income after the standard deduction, you would owe 10% of $9,075, 15% of $27,825 (the total income covered in the second tax bracket), 25% of $52,450, and 28% of $4,450 (the fourth tax bracket up to your taxable income). That calculation results in $19,439 in federal income tax — an effective tax rate of 19.4% based on the total income of $100,000. That amount could be further reduced by any tax credits for which you might qualify. Your effective tax rate would be considered lower if you’ve had other reductions to your gross income, like 401(k) contributions.

The new standard deductions and personal exemption.

As inflation effects the tax brackets, it also affects the standard deduction amounts. I mentioned above that the standard deduction for single files will be $6,200 in 2014, an increase of $100. For married taxpayers filing jointly, the standard deduction will be $12,400, an increase of $200. For heads of household, the amount of the standard deduction will increase $150 to $9,100.

The personal exemption for 2014 will be $3,950.

What is the possibility of Congress changing the tax rates?

Congress could make a new law at any time that changes tax rates. Last year, there was a big debate that centered around the extension of certain tax cuts. The government made the decision to break the cycle in which the tax rates required a vote every year, so for once, we might be able to get through the next few months without a debate about tax rates. Given Congress’s recent proclivity for negotiating like terrorists with hostages rather than sensible adults who were elected as representatives of the citizens of this country, there’s no perfect prediction of what might occur over the next few months.

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For most citizens of the United States, tax season is over. There’s no longer a need to run around gathering documents. You’ll stop seeing television commercials for TurboTax and H&R Block in which each insinuates the other is a deficient company. You can stop thinking about government’s wasteful spending and income redistribution — which always seems to benefit someone other than you — for a year.

Unless, like me, you filed for an extension.

Did you or will you be receiving a tax refund this year? If you received a refund, it doesn’t necessarily mean that you are being subsidized by other taxpayers; it more often signifies the fact that you’ve paid more than you owe to the government. How very generous of you to offer the government an interest-free loan; you can be sure that if you owed the government money, by not settling your tax bill in full for example, they’ll charge you interest.

The debate over whether it’s better to receive a refund or owe the government a balance in April is hotly contested, with proponents of receiving a refund enjoying the “forced savings” throughout the year. I don’t think that’s a great benefit. Exercise some self-control and manage your money for yourself.

Nevertheless, it’s April, and those refunds are coming fast. Getting a check from the government seems to elicit an explosion of glee. Savings isn’t foremost on everyone’s mind. The refund isn’t free money. Unless you’re a lazy employee and manage to get paid for sitting around taking up space in an office, you worked for that money.

Previously, I’ve explored several ways to use your tax refund for fun. Sometimes, a refund can be like a windfall. It’s money you weren’t anticipating — a bonus. Why not throw caution to the wind and go crazy?

Or, if you’re an adult with responsibilities and no flexibility in your budget, you may want to consider more reserved options. These aren’t nearly as fun, but if you’re looking to get to financial independence faster, so you can have more fun spending your money without that nervousness in the back of your mind about the potential consequences to your prospects for wealth, consider the following.

1. Keep your refund in your savings account.

This year, Harris Interactive conducted a study on behalf of the American Institute of CPAs, an organization for accountants. The study involved a survey through telephone calls to a sample of the public, and the results indicate that this year, savings is the number one target for tax refunds. That’s great news, even if it means that Americans are already somewhat insecure with their accumulated savings.

Even though interest rates for even the best savings accounts are annoyingly low, they are important tools for establishing an emergency fund.

A tax refund could go far in insulating a family against a loss of income or a change in career direction.

2. Pay off debt.

While the Harris Interactive survey ranked paying off debt third among the tax refund priorities of Americans, I see debt reduction as tied for first, or at worst, second. Paying off debt will actually have a better financial return at the moment than boosting savings, because chances are good your debt is at a higher interest rate, even after considering any tax benefits like a student interest loan credit or the mortgage interest deduction, than what you can earn in savings.

Use your tax refund to bid adieu to a stubborn student loan. Get your credit card balance to a more manageable level (and resolve never to pay interest on credit card balances again). If you can do so without a penalty, ship some of your newly received cash to your mortgage company as a prepayment, and continue to send your normal payments in the future to remain ahead of schedule.

Putting a tax refund towards debt is simply one of the most responsible uses of money. Your future self will thank you when she arrives at a point of financial independence sooner.

3. Invest for retirement.

Retirement is a valid concern for today’s young worker. The threats to future Social Security benefits are getting attention in the media, and while the media often explain that prudent savings can add to to $1 million for retirement over thirty years, writers and gurus also fail to mention that the present course of inflation will likely render $1 million insufficient for funding the lifestyle that a millionaire might enjoy today. If you’re retiring in twenty, thirty, of forty years, aim higher. Much higher.

Anything you can add to your retirement funds will help you in the long run, assuming you live long enough to reap the benefits. There’s always that risk, as morbid as it sounds. So retirement needs should be carefully balanced with making the most out of the time you have today.

An IRA is an ideal choice for investing a tax refund. You can choose between a traditional IRA and Roth IRA, and the selection depends on your expectations for taxes now and in the future. After depositing your refund into the bank, you can easily transfer the money into a new IRA opened at Vanguard (my recommendation), Fidelity (also a good choice), or any other discount online broker that offers free investing in their own low-cost index mutual funds.

4. Donate your refund to a charitable organization.

Unless you’re considering a potential tax deduction, giving away money is not exactly the quick path to building wealth. But you don’t give to charity just for the tax deduction. Even if you believe that money you give comes back to you in the future, that’s still not why you give. I’m not saying I believe pure altruism actually exists; I think most people give to causes and organizations they care about because helping others provides the giver a sense of purpose, accomplishment, and efficacy.

With an extra $5,000 to spend, you’d likely use it for something with little meaning. Give it to a non-profit organization, and they’d use the money to help in disaster relief, buy materials for building houses for the poor, or supply a school with musical instruments or other learning materials. You could fund a small scholarship.

5. Invest in yourself.

Your personal human capital doesn’t get the attention it deserves. The focus is on net worth so much that people may often forget that today’s numbers aren’t the full measure of a man or woman. Yes, by improving your human capital also means a higher potential for lifetime earnings, but being well-rounded is its own reward.

To invest in yourself, you can use some of your tax refund to enroll in for-credit classes that get your closer to another degree. You should also consider courses that, while not destined for a degree, improve your skills in your current career or open a path towards a new career.

If you have the capacity to be successful with a business on the side, in addition to your day job, your tax refund may be the capital you need to get started or to get ahead. Investing in your own business shows that you are serious about taking the nest steps towards building a career for yourself, with the goal of independence from corporate careers.

If you have your financial priorities squared away, are in no danger of going over your budget, and are already cruising towards financial independence, it’s understandable to forgo these responsible choices in favor of something more fun. Buying yourself presents, like vacations or improvements to your house or car, can give you satisfaction that may not come for a while if you’re investing for your retirement instead. There’s a right time and a wrong time to spend money frivolously, even taking into consideration the importance of treating yourself and your family.

It’s been a long time since I’ve received a real tax refund. I do try to slightly overpay on my estimated taxes, but that small refund is no consolation to me when I sign much larger checks for the government’s benefit.

Are you receiving a tax refund this year? What do you plan to do with the money?

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Whether you’re watching a twenty-four hour news channel, the local news, or national news “magazine” programs like 20/20 and 60 Minutes, the program directors need to be concerned about ratings. Television ratings are everything to those who work in this industry. If you can’t get an audience to watch a program, there are no eyes for potential advertisers to reach. Without advertisers buying the broadcast time between news segments, the network can’t produce enough revenue to justify operating the program and paying the salaries of anchors and correspondents.

While I was in California, a local news station produced an exclusive investigative report featuring hidden cameras, blurred faces, and a correspondent chasing down perpetrators with the camera operator jogging to keep up. The employees of a city’s Parks and Recreation Department, a state government agency funded by income received from taxes, were spotted bowling together during the work day. This comes after the same department was caught keeping a $54 million slush fund while threatening to cut public programs due to a lack of resources.

The timing was bad, obviously. After a $54 million scandal, it’s best to keep a low profile and avoid appearing on the news for any reason. And if you and your coworkers are going to participate in a team-building exercise, try to do it on personal time. There were some mistakes in judgment by those who planned this trip.

Anyone who’s ever worked in a group knows that “team-building exercise” is simply a code-name for having some fun outside of the office. In many cases, team-building exercises do in fact, particularly over the long term, help build better cohesion and cooperation within working groups. One day many years ago, when I was working for a major financial corporation, we used bowling for a team-building exercise. I was relatively new to the team, and it helped me socialize with my new coworkers. Towards the end of the work day and stretching into what would be considered personal time in a typical nine-to-five situation, we boarded a shuttle van and played a game or two at the local bowling alley.

The local news wasn’t there, chasing us with microphones, asking us why we were spending our time and shareholders’ money — the company had recently gone public — on a frivolous non-work activity.

Even if my company had been involved in some kind of financial scandal and needed to project a better image, or if like other companies in the same industry, had received taxpayer assistance in the form of Great Recession bailouts, would the company be criticized for a small bowling outing? Scale is important — one insurance company receiving bailout money a few years ago held an expensive retreat for executives, with the price tag in the millions of dollars. Bowling for about twenty mid-level employees seems immaterial in comparison.

A company with private shareholders, accounting their expenses to no one but a select group of investors, can get away with spending whatever they want on team-building exercises, which can actually work to increase productivity and effectiveness. Public companies that report their finances to the SEC or other regulators can still do what they want but have to answer to analysts and shareholders, many of whom understand that it’s fine to spend some money on expenses for employees.

Public organizations, those whose employees are paid with money collected via taxes rather than shareholder money, are held to tougher scrutiny. Everyone wants to know that tax dollars are being put to good use. A weekend conference in another city and a bowling trip during the work day don’t seem to be good uses of taxpayer money, but if these same events occurred at a public company, no one would care.

Should state or other government employees have the same kind of work benefits as those in the private sector when the funding comes from taxpayers? If not, why would anyone want to work for a government agency? This particular Parks and Recreation Department would have done better to avoid the public eye following the issue surrounding the slush fund, but to what extent? The employees were required to travel for the weekend — to work on the weekend — for a conference and wanted to take a few hours to go bowling.

Is bowling really such a big deal? It is when a local station can turn it into an investigative report with the added drama of correspondents shoving microphones and cameras in the faces of people who don’t want to be a television soundbite. The television station probably spent more money covering the issue than the Parks and Recreation Department spent organizing the incident in question.

Photo: Flickr

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As the I.R.S. is now accepting federal income tax returns, a war is intensifying. The war is between the major tax preparing companies. Intuit’s TurboTax, with its online and desktop software, and H&R Block, with its storefronts and online software, are the major opponents, and the battlefield is media, and the warriors are their advertising campaigns.

A few weeks ago, TurboTax released its latest set of commercials designed to criticize unnamed income tax return storefronts, easily assumed to include H&R Block and Jackson Hewitt, that look for preparers by advertising positions “with no tax experience necessary.” The implied message is that when you sit down to provide your income information in a meeting at one of these storefronts, the person helping you might not be a tax professional with extensive experience.

It’s no surprise. Tax season is short, and these stores require employees for only a few months. These are not full-time jobs, so there is certainly the possibility of finding your tax preparer with another job — say, your plumber or shop girl. After all, you don’t need specialized knowledge to handle most income tax situations. I was able to handle the submission of my federal income taxes for many years, even before I started learning about personal finance. In fact, I did my taxes by hand and by mail for many years before the IRS accepted online filings.

For this reason, the latest TurboTax television commercials have some truth. Here’s one.

H&R Block fired back with commercials following the format of employee testimonial, a way to show that some of H&R Block’s storefront employees do have extensive financial experience. The company launched a social media campaign, #IAMHRBLOCK, encouraging their employees to share photographs of themselves with signs describing their tax-related experience outside of filing tax returns for H&R Block.

Here’s a typical shared photograph from the #IAMHRBLOCK social media campaign, from tax preparer Cassi Schmigotzki.

H&R Block’s television commercial above makes a point that the company’s employees sign tax returns, which is of course required by anyone who prepares a federal tax return, unlike with TurboTax online, where you are the preparer. But that signature means nothing — the taxpayer is ultimately responsible for the contents of the tax return, not the preparer.

If you want in-person help preparing your tax return, having bought into the belief that it’s difficult to complete a federal tax return online and get the biggest refund, you need to look for the designation of Enrolled Agent or Certified Public Accountant (CPA), not just the title “tax professional.” That’s not to say that storefront tax preparers aren’t trained. There is an extensive training process, accessible to anyone with or without prior experience. But the training doesn’t leave you with the state or federal certification that you should insist on if you’re seeking professional help with your taxes.

With the Enrolled Agent and CPA designations, your tax preparer can represent you in front of the I.R.S. in the event of an audit, though if you have legal questions about the audit, you’d need an attorney, as well. H&R Block will represent you with an Enrolled Agent — and it may not be the same individual who completed your return and, in theory, is familiar with your situation — for an additional fee. The company does offer a guarantee that if they make mistake, H&R Block will cover the penalties and interest, and that’s a nice guarantee to have, though the I.R.S. normally waives the penalties and interest for first mistakes anyway.

You’ll still owe the extra money if the mistake resulted in a smaller payment due to the I.R.S. than it should have been. Pay another additional fee in advance, and H&R Block would even cover your underpayment — the fee in this case is a kind of insurance.

While H&R Block’s storefront employees can get their jobs without prior tax experience, some customers may feel better about meeting with someone in person. The training is comprehensive, but here’s the bottom line for those viewing the battling commercials and unsure of what to do:

  • If your tax situation is simple — you have only basic income forms and you are not an owner of a corporation — you can probably do just as well completing and filing your form online as any H&R Block storefront tax professional, and in the rare situation you do get audited, any professional you find will be just as good or better than the one assigned to your by H&R Block.
  • If your tax situation is more complicated, build a multi-year relationship with a tax accountant, someone who will be around for you at any time, not just during tax season.

Neither TurboTax nor H&R Block is winning the war of tax preparation. There are other alternatives, all of which are not presented by companies with the marketing power of H&R Block and Intuit. TaxAct offers free federal tax return filing, and other services exist for completely free tax filing if you meet certain qualifications. Free isn’t always the best answer — complicated situations require individual attention, support, and representation from an Enrolled Agent or CPA you can work with over a long period of time.

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Some Taxpayers Can’t File Income Taxes Until March

by Luke Landes
Taxes

Thanks to tax code changes like the American Taxpayer Relief Act of 2012, the law that put an end to the fiscal cliff bickering and uncertainty around this year’s tax rates, the IRS is behind with their normal process of updating forms and testing computer programming. While the government is usually ready for taxpayers to ... Continue reading this article…

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Fiscal Cliff Bill Passes: American Taxpayer Relief Act of 2012 (H.R. 8)

by Luke Landes
Senate

Late last night, the United States House of Representatives passed is designed to avoid the fiscal cliff, the bill already approved by the Senate that avoids the fiscal cliff, the automatic tax rate reversion and spending cuts agreed to last year by Congress. With recurring drama every few months, the government seems to be taking ... Continue reading this article…

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Plan for the Payroll Tax Cut Expiring in 2013

by Luke Landes
Tax rates

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2013 Federal Income Tax Brackets and Marginal Rates

by Luke Landes
Tax

When you file your federal income tax return before April 2013, you’re filing your 2012 taxes, and the 2012 income tax brackets define the amount of tax you owe to the government before credits and after-tax adjustments. The first paycheck or consultancy fee you earn in 2013 falls under new rules, however. The 2013 income ... Continue reading this article…

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Should Congress Eliminate the Capital Gains Income Tax?

by Luke Landes
Paul Ryan

Presidential candidate Mitt Romney has selected a running mate, Paul Ryan, who has proposed eliminating the income tax on capital gains. The Vice President of the United States doesn’t have the authority to change the tax law, of course, so there’s no reason to think this idea or the rest of Ryan’s fiscal plan will ... Continue reading this article…

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Sales Tax for Online Purchases

by Luke Landes
Modem

Today, the voting for the Third Annual Plutus Awards is open. If you are a fan of Consumerism Commentary, please vote for this site as the “Best Single-Author Personal Finance Blog.” Also take a moment to vote for all of your favorite personal finance blogs. Bloggers can also vote for their favorite financial products and ... Continue reading this article…

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Be Generous to Reduce Your Estate

by Guest Author

This is a guest post from Michael Maye at our partner site TheStreet.com By Michael Maye Individuals looking for a simple and effective way to reduce their future taxable estate should consider the annual gift exclusion. What is the annual gift exclusion and how does it work? Every U.S. citizen is allowed to give anyone ... Continue reading this article…

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The Delaware Tax Loophole

by Luke Landes
Delaware Memorial Bridge

Have you ever wondered why there are so many banks headquartered in the state of Delaware? This small state — where I happened to spend four years of my life while at college — is friendly to businesses. For a century, Delaware has boasted friendly tax codes and lax incorporation laws, inviting savvy business owners ... Continue reading this article…

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IRS Looking For Your Offshore Bank Accounts

by Luke Landes

The more money you have, the more likely you are to cheat on your taxes. The rich have more opportunities to try to hide assets and income from the Internal Revenue Service, particularly through offshore bank accounts. In the United States, banks are required to report income earned by their customers on savings and investments. ... Continue reading this article…

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How to File a Free Income Tax Extension

by Luke Landes

I finally provided my tax details to my accountant yesterday. As I expected, there won’t be enough time to work out the details before today’s tax filing deadline, so I’ll be filing extensions. In years past, when I filed for myself and my taxes were simpler, I usually waited until the last day. My procrastination ... Continue reading this article…

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How to File Your Taxes for Free

by Luke Landes

The federal government can only operate with the help of the millions of individuals who earn income in this country and dutifully pay taxes. You would think that, in order to ensure a smooth revenue stream of considerable size, the IRS would make filing taxes as easy and painless as possible. That’s obviously not the ... Continue reading this article…

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TurboTax 2012 Online Review

by Luke Landes
tt-featured-img

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Fix the Tax System By Taxing Consumption

by Luke Landes
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An elegant answer to the over-complicated tax system is to shift the basis of the system from income to spending. There have been a variety of proposals to make this happen. It’s the core of the so-called Fair Tax and Herman Cain incorporated its concept into his 9-9-9 tax plan. Other proposals have called for ... Continue reading this article…

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$362,000 in Income: Not That Much for Mitt Romney

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Home Mortgage Interest Deduction

by Luke Landes
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Although the home mortgage interest deduction is one of the most oft-cited benefits of owning a home, most taxpayers don’t take advantage of it because it requires itemizing taxes. If itemized deductions including mortgage interest paid throughout the year exceed the standard deduction, a taxpayer can take advantage of the benefit. The benefit isn’t as ... Continue reading this article…

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The Worst Celebrity Tax Problems

by Luke Landes

It’s with a tinge of schadenfreude that people are fascinated with the failures and foibles of famous celebrities. Every year, the IRS chases people who evade or underpay federal income tax, and actors and popular figures in the media, who often don’t manage their own finances, make the news. The latest is Lindsay Lohan. You ... Continue reading this article…

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